The Oh Shit! fund
I am a firm believer in an Oh Shit fund (emergency fund). Several things can happen to you when you might need some extra cash. Car breaks, loose your job, Medical bills, etc etc.
But how much?
Most people are getting OUT of debt, let alone stacking cash away for when shit breaks.
on top of that I don't know many people that have the problem of what to do with all that extra cash they have at the end of the month. so whats the plan?!?!?
Ok it kinda depends on your financial situation where to start.
For those of us who OWE money (credit cards and such). Its probably best to pay off credit cards first, here's why. All credit cards have an interest rate. Most have a HIGH interest rate. So the longer you take to pay that off the more your actually paying in total.
But joe! if i pay on the credit cards i wont have an OH SHIT!!!11! fund!
ok, your right. but lets say you have 1k in credit card debt and you pay it off then you need 500$ in car repair bills.... well you don't have the emergency fund but you DO have a 1k line of credit on the card you just paid off. and its better to pay off the Card and risk using it for future bills than pay the interest and bank some money when you might not need it before the card is paid off. (i say before the card is paid off, because you WILL at some point have something happen that you need some extra cash)
ok, now lets say you just don't have any extra cash at the end of the month to set aside. well I'll dive in depth later about saving/making money. but I'm more than confident that there is somewhere you can either save some cash or make a little extra. if its eating out less or donating plasma once a week. I'm sure you can find some.
OOOOK you've saved up 500$! congrats!
but how much do you need?
well how much do you spend a month?
now how much do you NEED to spend a month???
if you lost your job how long do you think it would take to get another one? the rule of thumb was keep 3 to 6 months of your take home pay set aside for when shit hits the fan... now i don't know about all of you but coming up with HALF A YEAR of my salary would take me... ages...
I always assume that if i loose my job im going to spend a month in my house before i move back into my parents while i search for a job. yea that would suck and be a gut check, but! i wouldn't have to pay ANY of my bills except of course i want to keep paying on my house.. bad things happen when you don't make your mortgage payment. now I realize that some of you cant move back in with your folks or even move in with a friend. but think about survival. if you lost you job you can give up a LOT.
So, I wouldn't say save up 6 months of your take home pay (but if you CAN then I'm not going to stop you, in fact if your at home, living with your parent's or in a position where you have some serious extra cash, banking it is never a bad idea). I would suggest instead of saving 6 months salary id save up 6 Months of Rent/Mortgage + an amount you feel like you could live on for a few months. ok, now that's still probably a huge number (that's over 4k for me just for mortgage.) but I'm sure its much less than 6 months salary and its attainable... no seriously it is... it might take a YEAR (or 3) but once you get there i promise you'll sleep much better at night. and when shit happens, you'll be ready for it.
and its always better to constantly save for an emergency fund than attempting to pay off debt occurring interest... or worse yet not be able to fix the thing that broke (if you cant drive your car you cant get to work...)
ok. now you've done it. you've saved 6 months rent plus a little extra to live on. pat yourself on the back and put it away... but where?
The bank? most banks give you .5% interest on your money (or worse). That's nearly nothing. your better bet would be to visit your bank and see what kind of deals they are giving on CD's (not those disks you put in your car to play music but a Certificate of Deposit) The longer the CD the more you'll make off it but keep in mind there is usually a penalty for taking your money out early. Id suggest you take your OS fund and put it into a 6 Month CD, and every time you don't need it you roll it over into another one. that way if you have to take it out early you only loose a few months return on the interest on your CD, rather than put your money in a 2 year CD and you need it after 7 months...
Now why go through the hassle? well 2 reasons.
1: better to make money off your money than to not, especially when its as easy as going into the bank and asking for it. (especially if you intend to sit on it)
2: inflation. that little thing you probably don't think about because it happens (usually) so slowly. as a for instance, this year inflation has been around 3%. what does this mean? well things cost roughly 3% more than they did last year. most of this has been in Gas and Food but 3% is still the average. soo.... if you stuck 100$ in the sock drawer and left it there. you still have 100$ but its buying power has reduced 3% (but i still have 100$ whats the difference!?!) how much does gas cost now? how much did it cost a few years ago? how much gas could you get for 100$ today? how much gas could you have gotten for 100$ a few years ago?
that's inflation (ok... there's a TAD more to it than that, but you get the idea), you want your OS fund to grow as the years go by because things cost more every year (on average). so think about this.. if your money ISN'T growing, gaining interest somewhere, your actually LOOSING money.
Later on I'll talk about Ways to save.
But how much?
Most people are getting OUT of debt, let alone stacking cash away for when shit breaks.
on top of that I don't know many people that have the problem of what to do with all that extra cash they have at the end of the month. so whats the plan?!?!?
Ok it kinda depends on your financial situation where to start.
For those of us who OWE money (credit cards and such). Its probably best to pay off credit cards first, here's why. All credit cards have an interest rate. Most have a HIGH interest rate. So the longer you take to pay that off the more your actually paying in total.
But joe! if i pay on the credit cards i wont have an OH SHIT!!!11! fund!
ok, your right. but lets say you have 1k in credit card debt and you pay it off then you need 500$ in car repair bills.... well you don't have the emergency fund but you DO have a 1k line of credit on the card you just paid off. and its better to pay off the Card and risk using it for future bills than pay the interest and bank some money when you might not need it before the card is paid off. (i say before the card is paid off, because you WILL at some point have something happen that you need some extra cash)
ok, now lets say you just don't have any extra cash at the end of the month to set aside. well I'll dive in depth later about saving/making money. but I'm more than confident that there is somewhere you can either save some cash or make a little extra. if its eating out less or donating plasma once a week. I'm sure you can find some.
OOOOK you've saved up 500$! congrats!
but how much do you need?
well how much do you spend a month?
now how much do you NEED to spend a month???
if you lost your job how long do you think it would take to get another one? the rule of thumb was keep 3 to 6 months of your take home pay set aside for when shit hits the fan... now i don't know about all of you but coming up with HALF A YEAR of my salary would take me... ages...
I always assume that if i loose my job im going to spend a month in my house before i move back into my parents while i search for a job. yea that would suck and be a gut check, but! i wouldn't have to pay ANY of my bills except of course i want to keep paying on my house.. bad things happen when you don't make your mortgage payment. now I realize that some of you cant move back in with your folks or even move in with a friend. but think about survival. if you lost you job you can give up a LOT.
So, I wouldn't say save up 6 months of your take home pay (but if you CAN then I'm not going to stop you, in fact if your at home, living with your parent's or in a position where you have some serious extra cash, banking it is never a bad idea). I would suggest instead of saving 6 months salary id save up 6 Months of Rent/Mortgage + an amount you feel like you could live on for a few months. ok, now that's still probably a huge number (that's over 4k for me just for mortgage.) but I'm sure its much less than 6 months salary and its attainable... no seriously it is... it might take a YEAR (or 3) but once you get there i promise you'll sleep much better at night. and when shit happens, you'll be ready for it.
and its always better to constantly save for an emergency fund than attempting to pay off debt occurring interest... or worse yet not be able to fix the thing that broke (if you cant drive your car you cant get to work...)
ok. now you've done it. you've saved 6 months rent plus a little extra to live on. pat yourself on the back and put it away... but where?
The bank? most banks give you .5% interest on your money (or worse). That's nearly nothing. your better bet would be to visit your bank and see what kind of deals they are giving on CD's (not those disks you put in your car to play music but a Certificate of Deposit) The longer the CD the more you'll make off it but keep in mind there is usually a penalty for taking your money out early. Id suggest you take your OS fund and put it into a 6 Month CD, and every time you don't need it you roll it over into another one. that way if you have to take it out early you only loose a few months return on the interest on your CD, rather than put your money in a 2 year CD and you need it after 7 months...
Now why go through the hassle? well 2 reasons.
1: better to make money off your money than to not, especially when its as easy as going into the bank and asking for it. (especially if you intend to sit on it)
2: inflation. that little thing you probably don't think about because it happens (usually) so slowly. as a for instance, this year inflation has been around 3%. what does this mean? well things cost roughly 3% more than they did last year. most of this has been in Gas and Food but 3% is still the average. soo.... if you stuck 100$ in the sock drawer and left it there. you still have 100$ but its buying power has reduced 3% (but i still have 100$ whats the difference!?!) how much does gas cost now? how much did it cost a few years ago? how much gas could you get for 100$ today? how much gas could you have gotten for 100$ a few years ago?
that's inflation (ok... there's a TAD more to it than that, but you get the idea), you want your OS fund to grow as the years go by because things cost more every year (on average). so think about this.. if your money ISN'T growing, gaining interest somewhere, your actually LOOSING money.
Later on I'll talk about Ways to save.